This tale did not end here. Within the year, the report containing the allegations against BAE would end up circling back on the very agency that issued it: the Pentagon Office of Inspector General, which is currently headed by Gordon Heddell (Claude Kicklighter was the Inspector General at the time of the report's issuance). But the backstory of the controversial Pentagon Inspector General report was not publicly known until last week, when Senator Charles Grassley, R-Iowa, issued a report detailing how the Pentagon Office of Inspector General has failed to aggressively audit contracts.

To understand the significance of the Inspector General’s original finding requires some context: BAE had been struggling to rebrand itself as a trans-Atlantic company, to be known as being just as American as it was British, in order to win the trust of the Pentagon, one of its biggest clients and one that was especially wary of handing over sensitive information to foreign partners. Furthermore, BAE had also been tarnished by allegations that it had engaged in years of bribery of Saudi government officials in a huge 1980s arms deal with the Middle Eastern country. Being accused of losing classified information did nothing to alleviate the trust deficit.

BAE vehemently denied the Pentagon Office of Inspector General’s (OIG) findings, its then-spokesman Greg Caires saying, “We strongly disagree with the IG's suggestion that ... information may have been compromised in some unidentified way by unauthorized access at BAE Systems.”

On top of findings related to BAE the OIG’s report contained arguably equally troubling, yet less well-publicized findings that a little-known Pentagon agency had failed in its job to ensure that BAE was adequately protecting classified information. Questions about the effectiveness of the Defense Security Service (DSS) in overseeing contractors had been bubbling to the surface since a 2004 Government Accountability Office report—but this was the first real example of the agency’s inadequacy to come to light.

In its defense, DSS Director Kathleen Watson told the OIG that “DSS has a thorough and fundamentally sound facility inspection process which was only marginally diminished by the failure to systematically collect, analyze, and retain BAE’s required reports.”

Clearly the stakes were huge—and although defense weapons scandals today are usually relegated to the business pages of newspapers, this was among the more major stories of May 2008. POGO broke the story when we obtained the March 2008 IG report through the Freedom of Information Act (FOIA) and The Washington Post, AP, Wired and other news outlets reported the story.

BAE, in particular, was pissed. That spring, the company “requested a meeting with the DOD IG to resolve what appears to us to be a misunderstanding of the underlying facts,” its then-spokesman told me. At least one meeting between the IG and BAE officials occurred over the summer of 2008, OIG employees have told me.

Then quietly, in October 2008, the report disappeared from the OIG’s website. On Friday, October 24, the OIG posted a letter from the day before. The letter, sent to the Defense Security Service, said the OIG report was being rescinded because of a lack of evidence to support its conclusion, including the finding that classified information may have been compromised.

“We appreciate the DOD IG’s thoroughness and willingness to reexamine this matter,” BAE's then-spokesman Greg Caires said in response to the news.

It was a massive turnaround. An Inspector General report that had slammed a Pentagon agency as well as one of the largest defense contractors had become a “black eye” for the Inspector General's office.

Red Flags Were Ignored

According to Grassley's report, it is “a rare and highly unusual action for any IG to withdraw an audit report.” A top OIG audit official is quoted in Grassley's report as saying that the F-35/BAE episode was a “black eye” for the audit office. (A second audit report was rescinded in early 2009, and that received significant attention from The New York Times since it began in response to a Pulitzer prize-winning investigation by Times reporter David Barstow into military analysts.)

“The ramifications of IG Heddell’s decision to withdraw this report cannot be overstated,” according to Grassley's report. “It had the potential of damaging the credibility of all OIG reports in the eyes of the whole department as well as defense contractors.”

What went wrong with the BAE report? Why did the Pentagon's top watchdog issue an audit where its conclusions were not fully backed up by evidence?

Grassley's staff found the following about this “extraordinary episode”:

“Five separate internal DOD OIG reviews of this report failed to detect this blatant disconnect” between the audit's conclusions and the evidence to support them;

“However, internal records indicate that on June 19, 2007—about 9 months before the report was issued, a senior Audit Policy Oversight official raised a red flag regarding the mismatch between the conclusions and the underlying documentation”; and

Furthermore, “this internal red flag was followed by two similar BAE red flags in December 2007 and again in May 2008, raising identical concerns about the report.”

“It is hard to believe that these red flags never popped up on senior management’s radar screen,” according to Grassley's report, “especially on a report that had taken so long to publish.” The report took two and half years to complete. One of Grassley's gripes with the OIG in general is that it is taking too long to finish audits.

Grassley concludes that: “All the warnings were totally ignored.”

Some explanations were offered to Grassley by OIG officials, including that there was a breakdown in communications and a failure of employees to carry out some of their duties. However, according to Grassley's report, “the problem appears much larger than that. There was a breakdown in the audit quality control review process.”

Misplaced Accountability?

The embarrassing reversal was perhaps bound to sweep up some of the OIG employees who were involved with the audit. But this has appeared to have opened up another can of worms.

The OIG told Grassley's staff that three audit office employees were disciplined. All three were reprimanded: one received a five-day suspension, one retired, and another was transferred to another division.

But the OIG did not volunteer information about a fourth employee, Grassley's report says, and this one “appears to have taken the brunt of the blame.”

That employee was removed and demoted from the senior executive service-level position to GS-15 (both are high-level positions within the government's civil service scale).

“It seems like he was the only one who was harshly punished for what happened,” according to Grassley's report, “Yet he was not even an OIG employee when the F-35/BAE audit was published.”

The firing of this individual struck Grassley's staff as odd, since he was punished for a lack of action that a senior official should have taken.

No senior management officials were held accountable for the failures that led to the publication of the erroneous report, Grassley's report noted.

(Note: In April 2009, in a front-page Wall Street Journal article, three of WSJ’s top national security reporters said that “computer spies” stole sensitive Joint Strike Fighter information. Whether this breach was the same as that referred to by the Pentagon IG auditors has never been confirmed. Lockheed Martin, the top contractor on the JSF program, denied that classified information was stolen.)

-- Nick Schwellenbach

Correction: the original version of this blog post incorrectly said that Gordon Heddell was the Pentagon Inspector General at the time of the BAE report's issuance in March 2008. Heddell did not begin until July 2008.

Comments

DOD/IG is doing what it does well, protecting the incompetent political hacks just as their office of civilian reprisals sides against those who raised the "Red Flags", the Whistleblowers who were looking out for the governments best interest.

Great blog! It is not unusual for the DoD IG's findings to be very thin in support. It happens all the time and is especially true of the IG's findings related to DCAA. We press and press for supporting evidential matter and often times the results are based on "judgement" and no real evidence. It is almost of though the IG believes they are above supporting their findings. Meantime, DCAA is spending a large precentage of each audit on documentation. More time is spent documenting findings for the GAO and IG, not the contracting officer. It is a huge waste of money for DCAA to create perfect working papers, but that is what Director Fitzgerald wants. Just as the IG lost its way, so has DCAA. Someone needs to get the GAO, DoD IG and DCAA together and say, bury the hatchet and let's get serious about oversight. Which Agency is going to do what and let's do it. Because in the end, the only winners are the contractors.